InvestmentsSep 20 2021

When is the right time to use active funds?

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When is the right time to use active funds?
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Tom Sparke, investment manager at GDIM, says: "We use passives in a couple of different ways in portfolios. Where we are looking to gain exposure to a specific asset we may use a tracker fund where an active fund does not provide a higher degree of value. For instance, in the bond space we have not seen much value in allocating to actively managed gilt funds and prefer to pay a low fee for general tracking of the market.

"We do this with US treasuries, European bonds and Chinese bonds too. In the equity space we will often use a tracker when we wish to gain generic exposure, or as a cost-effective way to top-up a position in a certain theme or region."

Fahad Hassan, chief investment officer at Albemarle Street Partners, says the rise of passive investment products has been “a force for good” for clients, with the active fund management industry “not living up to the hype”, and businesses only cutting fees when under regulatory pressure. 

Despite that, he sees a place for active funds in many portfolios. Hassan says the relative attractiveness of active versus passive solutions varies depending on the asset class. 

He says: “The cost versus performance debate in the last decade has clearly favoured passives, but we do feel client interests are best served by spending our client fees in the handful of sectors where active payback is highest. These areas include UK equities, smaller companies, high yield and corporate debt and global emerging markets.

"On a style basis, fund managers with a growth bias have shown multi-year outperformance. While outperformance versus a well-diversified index such as the S&P 500 can be difficult to achieve, active managers competing against poorly constructed passive alternatives may have the upper hand.

"An obvious example of this is the corporate bond space, where a handful of lower quality issuers can dominate an index. A passive product is only as good as its underlying index and not all indices are constructed with risk-adjusted returns in mind.”

David Merton, a director in the alternative solutions team at Fulcrum Asset Management, says: “We believe there are many examples of an active solution being superior to a passive one. At the outset, it is important to look at what you are trying to achieve when selecting between the two.

"At some point along the investment value chain there are going to be active decisions; be those implementing exclusions, proxy voting, or producing an index inclusion formula. The point at which an investor engages with each part of this value chain will depend on their governance level, beliefs and objectives.